The final turnaround model is Hays’ modification of Bibeault’s model (Bibeault, 1998). Hay’s modification creates a project management matrix that allows board and creditors to view the turnaround in terms of a business plan (Hays III, 2003). This allows for easy communication to all stakeholders and firmly defines what is to be done, by whom and in what order. Compared to the Scanlon Plan and Teng’s Patient model, the project orientation is considerably more delineated, and allows staff to understand where in the process they are at any time. This then has significant advantages in terms of communication and planning.
The turnaround matrix is composed of five phases, with each phase having a number of objectives to complete that part of the firm’s turnaround. Likewise each phase lists by department the required actions or tasks to be met, in order for the objectives of that particular phase to be completed. See figure one below.
Figure 1. The ACTP Turnaround Matrix
As can be seen, the process is far more prescriptive than Teng’s three-phase model, which in composed of the surgery, resuscitation and nursing phases. Each phase in ACTP model, clearly defines the central intent of that particular phase.
The Management Change Phase
The first phase of the ACTP model is taken from the perspective of the board of directors and the secured lender. The objective is to select a top management team to manage the turnaround and remove any impediments either in the existing management team or on the board of directors itself. This is done, to ensure that the top levels of management in the organisation have complete support for the turnaround. Hays (Hays III, 2003) emphases, that early on honesty solves a considerable amount of problems and builds credibility that is badly needed and desired by staff. This contention is strongly supported by Khandwalla (Khandwalla, 1983):
“Powerful though the change agent may be, he is likely to be viewed with indifference or distaste be many insiders if he is an insider, or with suspicion if he is an outsider. Accomplishing the implausible or facing up successfully and dramatically to a crisis seems to be a common means of earning credibility from the sceptical rank and file”.
Like in the Scanlon Plan, staff support is enlisted in order to allow a full briefing of what is wrong with the company, and to enable the firm to quickly “pull itself together” out of the current crises. Constant communication is mandatory, as this provides the unity needed to encourage stakeholders that the turnaround is on the right track. The clarity of turnaround matrix aids in this process.
Telling the truth about the current financial situation is normally the easiest decision for turnaround management, but the most difficult for senior managers who normally are in denial of the situation at this time (Castrogiovanni et al., 1992). Nueno observes that turnaround managers can detect this behaviour by the following:
“When dealing with employers or managers involved in such self-deception, on more than one occasion we come across a hyperactive person, continually immersed in mega-meetings, travelling untiringly, but carefully avoiding the real problem: the company has no future unless something drastically different is done” (Nueno, 1992, 7-182).
Should the real situation leak out later on however, all trust is lost. This situation is similar to building of committees in the Scanlon Plan, and the communication process in the surgery phase of Teng methodology. For all methodologies to be successful, total communication must occur.
This combined with a matrix timeframe for the restructuring also allows staff to plan more effectively and removes delays and insecurities, which can lead to an exodus of better staff (if they have not left already). A view supported by Hays (Hays III, 2003).
Any resistance to change by senior management should result in those people being moved on, as the chances of a successful turnaround diminish greatly if there is not full support at the top level (Colino, 1986). Leonard (Leonard, 1983, 42) in addition, spells out that there must be absolute commitment to a course of action, and to root out any ideas that the recovery plan can be “altered” or “modified” later on.
This phase maps precisely to Teng’s communication process where the board will normally hire a turnaround specialist, a corporate lawyer, and / or an investment banker to help with the process.
Exactly where the turnaround manager works will be dependent upon the board and the creditors.
Bruton observes that in many Asian situations, complete autonomy is not given right away (Bruton et al., 2001). This is very different from many western turnaround models, where turnaround managers will not enter in to a firm unless complete autonomy is given by the board and / or creditors (Sutton, 2002). Some creditors will stipulate that the turnaround manager must take the Chief Executive Officers position, while others may not show any interest, so long as the turnaround itself eventuates. Interference from creditors, shareholders and directors (now matter how well intentioned) can easy cause the turnaround to fail, due to confusion of over staff accountabilities and line authority. As such, the turnaround manager must take care to keep them at arms length during the turnaround.
The Situation Analysis Phase
In the situation analysis phase the turnaround team seeks to determine the “full extent of the damage” on the firm operations, strategy and finances. Bibeault (Bibeault, 1998) defines the primary objective at this point to be:
“Can it survive?”
The most important part after this question has been answered is to determine the companies present cash flow, income statement and balance sheets in order to assess where most of the “damage” is coming from.
This argument is reinforced by Altman (Altman, 1993)who reasons that the central objective is to determine whether or not the company can in fact be saved; with the assessment dependent upon the liquidation versus salvage values, the time involved in the turnaround and whether any turnaround is generally reasonable. Platt (Platt, 1998) cites a lack of market focus, over diversification and the need for turnaround managers to retrench business that were to highly leveraged, as common examples of business failure
Like in Teng’s concentration process of the surgery phase (Teng, 2002), this stage requires management and employees to be interviewed, departmental finances, projects and expenses assessed and finally the organisation itself evaluated to ascertain its position in the market place. By doing this, Platt (Platt, 1998) maintains turnaround managers not only have a solid grasp of the costs and headcount of each department, but also identify which managers and staff are “liberal” with the firm’s money. Such a situation also arises in the “open book stage” of the Scanlon Plan. The transparency of spending process in itself, it likely to display questionable business purchases.
Pate (Pate & Platt, 2002) recommends identifying the ratio of expenses to sales, and identifying what expenses have changed. Sales may have declined due to inadequate marketing, and low gross or net profit margins may indicate incorrect pricing. He states:
“If you want to alter and sharpen consumers’ perceptions of who you are and what you offer, you may find that changing your product-price mix is often as effective as changing the products themselves”.
This reinforces the argument that some turnarounds may in fact be strategic in nature, rather than operational (Hoffman, 1989, 46-66). As such, it is important to determine such a turnaround strategy here, before a preliminary action plan is composed.
Furthermore, price increases must be planned and take in to account where the product will be positioned in the market in the long term (another strategic decision), and should be a reflection of best practice price to volume ratios. Present customers must informed of the future price rises, with complete details as to why it has occurred. Sutton (Sutton, 2002) reinforces this tenet by recommending that if turnaround managers can’t decide, they should “force the issue”. By either removing the product altogether or raising the price 10% and if that doesn’t work lowering it by 25% to see if the product or service will be brought in volume.
The turnaround manager must then to determine what preliminary action need to be taken to return the firm to a breakeven or preferably achieve a cash-positive position. The action plan created seeks to address only the most pressing problems first. It must achieve management buy in (similar to both Teng and Scanlon), be achievable and all parties must understand that major changes may be necessary as new evidence comes to light. This is particularly important as Hays (Hays III, 2003) reports that during the last five years, situation analysis has become even more important but also more difficult. This view is support by Whitney (Whitney, 1987, 49) who states that turnaround management was seldom necessary before the 1970’s. He says:
“Then during the 1970’s, trouble appeared. Economists, political analysis, and social scientists can debate the causes. The effects were palpable: the rate of environmental change accelerated and competition intensified”.
Further Hays the increased difficulties due to the size of frauds like the Enron, the shortening of product and market cycles and increased global competition, turnaround managers face increased difficulty in assessing the situation of the firm and its market before conditions change to make the turnaround untenable.
The emergency action phase’s objective is to gain control of the companies’ situation as soon as possible. This means to achieve at least a breakeven cash flow which is stable, and to ensure that the assets needed for long-term recovery remain unimpaired. It is during this phase that layoffs, plant closings, cost cuttings, the abandonment of unprofitable product line(s) & conversely the acceleration of high potential opportunities occurs.
Platt (Platt, 1998) advocates choosing the layoff targets quickly. As it is sometimes cheaper to dispose of these people, plants, processes or products as fast as possible, rather than looking for efficiency or profitability gains. This is particularly important with slow paying customers who as Nueno observes can be one of the easiest parts of the cash flow system to fix. He notes:
“It may be that the customers know the company is unlikely to threaten to stop selling to them; it may be the sales department is not on its toes…but the fact is that slow payers in an industry tend to accumulate in its weaker companies” (Nueno, 1992).
In most cases, the firm does not have the time or resources necessary to carry out any potential gains and better economic utilisation of the firm’s recourses can be made elsewhere. Further, a change in fuel costs, interest or exchange rates can make these “potential winners complete losers” anyway.
Conversely in strategic turnaround situations, aggressive marketing is of the utmost importance, especially in situations where efficiencies do not allow for more cost cutting. E.g. Strategic turnarounds as described by Hoffman can be particularly marketing orientated (Hoffman, 1989).
In order to gain sufficient cash flow during the emergency action phase (and jump-start the companies failing health), many marketing departments and sales are needed most. Sutton (Sutton, 2002) recommends poaching or hiring redundant sales staff from competitors, as this allows for inside information on costs and product differences.
Finally tight marketing metrics should be adhered to, to ensure that staff note any potential change. A few easy wins on the board by having “fire sales” or running competitions can greatly improve morale.
When cutting operating budgets Pate (Pate et al., 2002) comments that many turnaround managers immediately begin by cutting headcount, without looking at other alternatives. As a result, unrealistic operating budgets are created that do not focus on solving the underlying problem. To best identify problems, year-to-year comparisons of expenses to sales are needed, in order to correctly identify costs.
Following this, calculations can be made on the extent of the cutbacks needed in each area in order to return the company to break even or preferably a small profit (Altman, 1993). Hence, like the Scanlon Plan the amount of needed cost cutting per department or product is identified, rather than an arbitrary amount.
Likewise other alternatives to reduce costs should also be considered. E.g. pay cuts, part-timers instead of full time staff, combining staff functions, scheduling shorter working weeks, using forced leave and cutting perks.
Reducing fixed and variable overheads is the third part of cost cutting that turnaround managers must implement. Outsourcing being the easiest way to “manage out” many non-core functions, that may be cheaper to purchase elsewhere. Types of outsourcing may be payroll, security, human resources and information technology (Hays, 1998, 84). While other savings may be from getting overseas and domestic staff to work from home to save on office costs.
Finally, debt-servicing agreements should also be investigated to see if the terms need reviewing. Platt (Platt, 1998) also supports this, but describes financial restructuring as a third and separate type of turnaround. This phase is the equivalent of the Cost Control and Cash Flow Processes in Teng’s Surgery Phase (Teng, 2002).
Sometimes the turnaround may require quick surgery, in order for the firm or company to be sold. If however, the cuts are not deep enough, then the risk of liquidation is likely. All this requires a very focused and fast action oriented management, and a clearly defined strategy. However because turnaround actions are so fast, (Castrogiovanni et al., 1992) observes that promoting active communication from the organisation (especially direct to the CEO from frontline staff) becomes more important.
Like firms that grow too quickly, decisions can be made that have hidden caveats or errors, that other staff may spot. Hence both feedback and vision are important. Vision because it maintains company directions through careful planning, and feedback to gauge staff concern on company decisions. E.g. Loose spending, or the long-term effects of short-term decisions. Frost (Frost et al., 1973) maintains that lack of planning and feedback has resulted in huge corporate blunders, most of which could have been avoided, had management heeded the advice of their staff.
Naturally staff can not communicate, if management is not there to listen. As such, open communication can only occur if the CEO and senior managers “walk the office” (Bibeault, 1998). Locking one self away not only isolates management from staff, but worse, communication can only occur via the senior staff that enter the office. Sutton agrees, stating many managers can “bunker themselves in” (Sutton, 2002). This can enable misinformation because “news feeds” are coming from a source which may not have the turnaround managers best interests at heart. Whitney observes:
“Managers… often discover unsuspected problems as well as suggestions for solutions. One-on-one encounters may spark insights that can lead to new product ideas or marketing programs. These direct contacts may also point to potential new managers who have been submerged by the chin of command or hidden by a hostile supervisor. An additional bonus can come in the form of improved moral and greater enthusiasm for the companies goals” (Whitney, 1987).
The Business Restructuring Phase
As Hay’s (Hays III, 2003) indicates, the business-restructuring phase is particularly difficult. The objective is to enhance profitability by gaining operational and strategic efficiencies.
Bibeault supports this argument; remarking the focus is on increasing the firms return on assets, and shareholder value (Bibeault, 1998). Likewise the emphasis also moves on to staff and management development. Careful resource planning is required when setting time periods for rehiring people. Delays can result in productivity problems when economic recoveries occur; and even then significant time and energy is may be required to recruit employees who are knowledgeable about the business and the customers, an argument also raised by Teng.
Like all business restructuring phases, the change of the organisation to a customer and competitor focus is another commonality. Harker (Harker et al., 1998) recommend managers determine where the present product mix is against their competitors and from there, determine where it should be moved to, and reinforcing accountably by setting clear responsibility based on product or market lines.
“Involvement status and trust of the sales teams improved dramatically…. As they became responsible for their own markets”.
A recommendation reinforced by Teng (Teng, 2002). However, determining an appropriate combination of customer to competitor orientation can be difficult especially if the market is in flux. Further, some products may simply need to be dropped, even if profits may be forthcoming, due to the long-term likelihood that the competition will dominate that market.
The danger of this particular phase Hays (Hays III, 2003) discusses is for the firm to start becoming lax in its management practices. Old processes and ways of doing things can start to slip back in to the organisation as workers start to relax. Therefore Sutton (Sutton, 2002) recommends keeping cash tight by paying off debt or investing in new products, forcing vigilance on company efficiencies.
Should this phase not succeed, the likelihood of another company demise is greatly increased.
The Return to Normal Phase
This last phase has some overlap with the previous phase. Although the business has now been restructured, the focus moves to ensuring that the company culture is “bedded down”. Therefore spending during this time must be particularly stringent and good best practice processes and values rooted in to the firm culture. To do this the turnaround manager must refocus the firm back on to its central values.
In the case of turnarounds, staff have be used to a new way of doing things. Ghoshal (Ghoshal & Bartlett, 1994, 91-112) reiterates that staff must be taught that change is constant and only by having a willingness to accept failure can firms have a chance to enter new markets when old products begin to mature. As such, training and development take on an important focus from the CEO downward. This view is similar to Sutton who observes that many managers are enthusiastic of lifelong learning, but when one checks their resumes it seems the interest is held so long as others are learning lifelong.
Ghoshal (Ghoshal et al., 1996) explains, that by encouraging ongoing development, all staff are taught to constantly re-evaluate what they are doing. This encourages a flexible approach not only to their existing work, but the benefits of ongoing training mean that movement to newer work areas is easier and offers their associate’s a different perspective.
At this point Hays (Hays, 1998; Hays III, 2003) warns that the greatest trap for turnaround managers is a drop in morale. “Nothing can deflate a motivated worker more than the cynic, the armchair critic or the bystander”. Mediocrity can be situational and dependent upon the subject/interest being worked on. Personalities of this type give just enough capacity for management not to spot the pattern until it may be too late. As Sutton (Sutton, 2002) reflects, many managers can get used to this attitudinal display, and begin to just give the “occasional prod” when in fact removal may be preferable, as the effect on others is more insidious. To monitor such possible cultural difficulties however, Nueno (Pedro Nueno, 1992), states that turnaround managers must consistently stay out of their office facilitating the turnaround process, so as not to miss vital worker, customer and market signals.
The ACTP has a number advantages over the previous identified models. Firstly it is considerably more process orientated than the Scanlon and Teng methodologies. This has the advantage of being easier to communicate to stakeholders and project manage. Conversely, if one follows the methodology “to the letter” then a number of management decisions could be left out.
Like the other methodologies its value increases when financial, marketing and operational metrics are also used. Hence, in order to perform a situational audit of the firm and monitor its progress across the turnaround matrix, these metrics need to be identified and defined.
Furthermore process based methodologies can sometimes become inflexible when they are used for a situation they were not designed for. Clearly in the case of working in Asian cultures Teng’s model has some advantages, but with the increased time and market pressures mentioned by Hays III, this may become more irrelevant. Likewise, the focus of the turnaround matrix is on operational changes first, and strategic changes second. But as Hoffman and Platt both indicate, the strategic changes needed may not be operational in nature. Drucker (Drucker, 2002, 12) observes that such a situation is occurring with increasing frequency, especially in regarding to software, biotechnology and other knowledge-based industries .
In like manner, the ACTP does not make use of staff in terms of cost savings as in the Scanlon Plan. For example, when continental airlines was facing bankruptcy, the aim of management had been to turnaround the firm via staff cuts, but eventually they adopted the Scanlon Plan when it became clear that staff had more ideas on how to cuts costs than management did. Further, because the firm was facing bankruptcy, the unions and management modified the plan, so that any savings were paid later when the firm returned back to profitability. Hence it could be argued that greater staff involvement may be needed in the ACTP methodology. This argument is support by Teng’s stipulation that many more workers are now well educated, and are not only more aware of the firm’s problems but more importantly, know how to solve them.
From this literature above, it can been seen that turnaround management has developed mainly through the industrial and manufacturing areas. It is at this point then, that the focus of the paper turns to the investigation of the turning around of software companies. An area not fully documented at this time.
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